Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the shareholders call regarding the H1 2021 results. [Operator Instructions] I am now pleased to present Cyrille Ragoucy, Chairman of the Board and CEO; and Jan-Christian Werner, CFO; and Emmanuel Rigaux, CTO. Gentlemen, please go ahead.

Thank you very much, and good morning, everyone. And welcome to Balta's First Half 2020 (sic) [ 2021 ] Results Call. If you have not done so already, you can download the earnings statement and this presentation from the Investor Relations section on baltainvestors.com. I need to start with bringing your attention to the disclaimer on Page 2. I will not read it out, but please make sure that you have read it. So turning to Page 3 for today's agenda. I will start with the general summary of the first half of 2021. Emmanuel Rigaux, our CTO, Chief Transformation Officer, will then elaborate in more detail on our NEXT results. And Jan-Christian Werner, our CFO, will take us through the financial review. We will end the call with a question-and-answer session with the analysts following our stocks. So turning to Slide 4 for the financial summary of H1 2021. With Q2 2021 included we have recorded a full consecutive quarter of significant year-over-year revenue, margin recovery and growth since COVID-19 impacted our business. The reopening of retail outlets supported the second quarter of 2021. Notwithstanding some remaining COVID-19 restriction and an adverse U.S. dollar exchange rate, our H1 2021 adjusted EBITDA margin of 13.9% added well above last year's, reflecting the strong revenue performance as well as our margin impact of NEXT and the timing effect of lower H2 raw material price flowing in our P&L. With a strong business recovery, fixed expense have normalized as temporary savings measure expired. The recovery does not come without challenge. Since the start of the year, we have experienced much higher raw material and transportation costs, combined with a lack of availability of material and containers. In response, we have implemented price increase across all divisions. And if necessary, we will ensure further appropriate response to global economic uncertainty. Let me now provide you with the highlights for H1 2021. So we ended the first half with consolidated revenue of EUR 318 million, which is almost 20% above last year first half. Despite some ongoing restrictions, we saw a continued ramp-up in Rugs and Residential. Commercial revenue remained stable, but is yet to recover from pre-COVID-19 levels as corporates are still investing very cautiously. Adjusted EBITDA was EUR 44 million with an adjusted EBITDA margin of 13.9%. The adjusted EBITDA ended up EUR 25.9 million above last year's first half, which by the way, was really subdued. So the profitability improvement reflects the positive upside of volume recovery, NEXT initiative and the final tailwind of lower raw material price from the second half of 2020. Our leverage further improved to 3x from 4.2x at year-end 2020. Year-on-year, net debt increased to EUR 295 million, mainly driven by seasonal working capital patterns and the one-off refinancing fee related to the successful extension of the senior secured notes. JC will provide us more detail on our financial results later in this presentation. I now give the floor to Emmanuel for the next update.

Thank you, Cyrille, and good morning to everyone. So moving to Page 5 for the latest NEXT numbers for H1. So in the first half of 2021, our NEXT program continued to deliver strong results and a material part of our margin improvement in the first 6 months of 2021 was once again achieved through NEXT action plans. Both the NEXT revenue and NEXT margin initiatives now put us ahead of the targets that we shared earlier. Regarding our top line growth initiatives, we are well on track with EUR 100 million of cumulative sales since we started NEXT, a further increase of EUR 20 million in the last quarter. We achieved year-on-year EUR 32 million incremental revenues in H1 2021, which represents 10% of our total revenues. More specifically, in e-commerce, we continued to grow our U.S. e-commerce revenues, and we also have established European partnerships with leading digital platforms. E-commerce in U.S. pure players and e-commerce in Europe almost doubled versus the same period of last year. Our direct route-to-market approach to architects and developers and other high-growth segments in commercial tiles consolidated year-on-year as demand remains subdued from COVID-19 restrictions as Cyrille already mentioned. But we see some segments returning to pre-COVID-19 level growth rates such as education in the U.S., for example. Other NEXT revenue initiatives continued to deliver strong results with EUR 26 million of incremental sales in the first half of 2021. And our new sustainable qualities in Rugs, new generation and regeneration, particularly, have experienced continued high demand from our customers. Moving on to Page 6 for an update on cost and margin improvements. So there, NEXT initiative achieved EUR 4 million of incremental adjusted EBITDA versus 2020, and we continue to have a strong pipeline of NEXT cost initiatives. So with EUR 14 million of net cumulative adjusted EBITDA savings, we have now put ourselves ahead of the program EUR 16 million overall target. I now give the floor to Jan-Christian for the financial update.

Yes. Thank you, Emmanuel, and good morning, everyone. Turning to Page 7 for the first half year revenue bridge. Revenues for the first half of 2021 were EUR 318.3 million, representing a year-over-year growth of 19.5%. While last year's second quarter was heavily impacted by the COVID-19 outbreak, revenues for Q2 2021 increased 55.4%, representing a EUR 59 million year-over-year growth. The Rugs and Residential business continued a positive upward trend we have seen since the COVID-19 outbreak in the second quarter of last year. Rugs grew in all geographies. We locked in significant gains in U.S. direct shipments. As Emmanuel already explained, Rugs e-commerce also continued its growth. Our residential business benefited strongly from the reopening of the retail outlets, as restrictions in key markets ended. Lastly, our commercial business remained stable and still continues to await post-pandemic recovery. We continue to experience longer project lead times for commercial projects as well as cautiousness on corporate investments. In Rugs, H1 revenues were EUR 124.8 million, up 48% versus last year. In the U.S. our direct shipments performed very strong and significantly outperformed last year's first half revenues, while Europe benefited from the reopening of retail stores and shops. U.S. e-commerce revenues continued to grow, although still below expectations, and therefore, still challenged by fixed costs and waiting to achieve enduring profitability. Our Commercial business revenues declined year-over-year by 7.4% to EUR 93.1 million, as we still experienced COVID-19 headwinds with corporate cautiousness on starting new projects. Our U.S. Commercial revenue additionally suffered from the unfavorable U.S. dollar depreciation. In Residential, revenues increased year-over-year by 27% to EUR 92.4 million. The key drivers were strong demand and the reopened retail outlets in our key markets supported by strong growth in our export business outside of Europe, which year-over-year improved by more than 50%. Now turning to Page 8 on the first half adjusted EBITDA. Driven by the before-mentioned strong business performance, the contribution margin increased by more than 3 percentage points versus H1 2020 to 34%. While the first half of 2021 was still supported by roughly EUR 2 million of favorable raw material pricing delay, time delay before purchase prices come into the P&L, the main driver for the contribution margin increase is our business transformation to more higher-margin products, growing export sales as well as overall increased efficiency due to our lean projects. While fixed costs continue to be managed closely in line with the reopenings as well as strong business in Rugs and Residential, fixed costs have normalized year-over-year. Having in mind that the second quarter of 2020, fixed costs were strongly supported by partial plant closures, voluntary salary waivers by management as well as governmental support measures like economical unemployment. However, due to the continued tight cost management for the first half of 2021, fixed cost remains approximately EUR 2 million below the same period last year. Adjusted EBITDA for the first 6 months of 2021, therefore, ended at EUR 44.2 million, up EUR 25.9 million or 142.2% above last year. Combined with the exceptionally strong second half of 2020, LTM adjusted EBITDA reached close to EUR 94 million as of H1 2021. This is driven by the strong second -- this is driven by the second quarter of 2021 with an adjusted EBITDA of EUR 23 million replacing last year's second quarter adjusted EBITDA of EUR 1.2 million. The H1 adjusted EBITDA margin consequently strongly increased to 13.9%, up 7 percentage points year-over-year. Rugs adjusted EBITDA in the first half was EUR 21.1 million, up EUR 20.1 million. It should be noted that the Rugs first half of 2020 was particularly wheat, as the strongest COVID-19 impacts were incurred already from March onwards until June 2020. The adjusted EBITDA margin increased significantly from 1.2% to 16.9%, driven by the strong volume growth in respect of production efficiencies, favorable raw material pricing effects as well as continued NEXT improvements. Commercial adjusted EBITDA for the first half was EUR 15.1 million, up EUR 1.2 million or 8.2% compared to the same period last year. Despite revenues still impacted by COVID-19 and an unfavorable U.S. dollar translation, the adjusted EBITDA margin improved to 16.2% from 13.9% during last year's half related to continued fixed cost savings in the U.S. and the continued NEXT efficiency improvements. While the post-COVID-19 recovery, as experienced in our other business segments, is still pending in Commercial this underlines once again the resilience of our Commercial business. Residential adjusted EBITDA amounted to EUR 8 million, up EUR 4.9 million or 158.1% compared to last year. The adjusted EBITDA margin of 8.6% is well above last year, driven largely by the strong revenues and NEXT savings. Moving on to Page 9, cash flow. The H1 ending cash position amounted to EUR 87.5 million, including EUR 59.2 million drawn under our revolving credit facilities. Hence, a small increase in net cash during the second quarter by EUR 0.3 million. Overall, for H1, this represents an EUR 18.8 million decrease in cash versus the end of 2020. Included in the first 6 months cash change is a EUR 4.2 million repayment under the RCF facility as well as extraordinary financing expenses of circa EUR 11 million, primarily related to the successful extension of our senior secured notes. With a further EUR 10.8 million available under our revolving credit facilities, total available liquidity amounted to EUR 98.3 million as of the end of Q2, in line with Q1 2021. The cash consumed during the first half is largely related to EUR 14.1 million of changes in working capital, the corporate tax payments in U.S. and Belgium and the coupon payments on the senior secured notes. Breaking it down further, working capital is predominantly affected by increased inventories of EUR 31.3 million as compared to year-end 2020, driven by price increases, as a result of the sharply increased raw material prices as well as our typical seasonal patterns driven by product launches and season sales. As of the end of H1, we continue to not observe any material changes in payment terms, factoring levels or bad debt levels. Finally, CapEx spending during the first 6 months amounted to EUR 12.9 million and is well in line with guidance, while leaving a lot of flexibility for the remainder of the year, if required. Moving on to Page 10, net debt and leverage. Our net debt position, including EUR 34.6 million of debt related to IFRS 16, amounted to EUR 294.9 million at the end of June 2021. Excluding IFRS 16-related debt, net debt was EUR 260.3 million. The slight increase in net debt by EUR 2.1 million during the second quarter 2021 is primarily driven by the capitalized interest in anticipation of the September coupon of the senior secured notes and normal depreciation of our leasing facilities. Based on the strongly improved last 12 months adjusted EBITDA, our net leverage decreased materially by 1 turn quarter-over-quarter to 3x by the end of June, well below the pre-COVID crisis levels of 4x as of year-end 2019. With that, I will give the floor back to Cyrille.

Thanks a lot, JC, and thanks for those clear explanation. Before we move to Q&A, let me conclude the first half of 2021 earnings presentation. So the first -- these results confirm our recovery. Overall, the H1 adjusted EBITDA increased year-over-year by 142% and the adjusted EBITDA margin further improved from 6.9% to 13.9%. H1 2021 benefited from the final impact of the H2 2020 due to lower raw material price flowing into the P&L. Our revenue continued to recover from pre-COVID-19 level. Rugs and Residential recovered significantly. Commercials remained stable, but yet to recover to pre-COVID-19 level. And -- as corporates are still very cautious in investing. Our NEXT program continued to deliver strongly in the first half, contributing to a material part of our margin improvement and putting us ahead of the target. In our Rugs business, the adjusted EBITDA margin remained healthy, supported by significant growth in all geography and strong U.S. direct shipments as JC told us. In Residential, our main market benefited from the end of most COVID-19 restriction and the continued focus on high-margin products. In Commercial, volume are still to recover to pre-COVID-19 level. The adjusted EBITDA margin increased above 16%, thanks to fixed cost savings in U.S. and NEXT initiatives. And finally, I would say that our cash is comfortable at EUR 87.5 million with an additional EUR 10.8 million headroom under the RCF. Our net leverage, as JC explained, is now at 3x, driven by strong H1 adjusted EBITDA improvement. So therefore, well below pre-COVID-19 levels. As I said previously and at the start of this call, this recovery from COVID-19 does not come without any challenge. We have implemented price increase across all divisions in response to the material and transportation price increase experienced since the start of 2021. This price increase have already started to benefit Q2 2021 results. While for accounting reasons, the cost increase will impact H2 2021. We continue to closely monitor the inflation of freight and raw material and the lack of availability of materials, overall, and containers. We remain vigilant to ensure we continue to respond appropriately to the global economic uncertainty. Let me conclude the earnings presentation by reemphasizing that Balta management is committed to further transform Balta by improving operating performance, prudent cost management and executing our NEXT strategy. On top, I would like as well to thank and recognize the Balta team that is making by their dedication and commitment these results possible. So finally, just an information. Q3 2021 results will be on the 29th October 2021 at usual 10:00. So let me hand over to the operator for Q&A, if anyone has any Q&A.

[Operator Instructions]

Okay. Well, if there is no question, that means that we've been very clear, I guess.

One question, just arrive if you want it?

Okay. Sure.

So we have 1 question coming from Saad Moazam from ING.

I am Saad, on behalf of Maxime Stranart From ING. I have a few questions. I would like to start with asking how do you expect raw materials to affect Rugs division margins in 2H '21, absolute or BPS? Question number 2, what is the commercial pipeline view for 2H '21? And when do you expect to be back at pre-COVID levels? And the last one would be what could be the e-commerce as a percentage of sales in Rugs? That would be all.

Thanks, Saad. So we don't give any guidance on the -- on raw material impact. Well, obviously, and what we said and JC will talk about it a bit in more detail than me. But what we said is part of the raw material impact has been seen already in H1, but it's only part of it. The big part will come in H2. We have already put some price increase in -- and which are part of it in H1 as well. The second part will be in H2. This is raw material. You understand that it's not only raw material that is going up. It's logistic cost, it's all material, actually. And everything that we're touching is going up and electricity price is going up, gas price is going up. So it's -- we're -- it's something that we -- and this is what I was saying during the call is, we are looking at that extremely carefully. It's -- it needs to be followed extremely tightly, and this is what we're doing. And we feel that we will be successful at implementing those price increases as we have been successful, by the way, in the first half. And maybe, JC, you want to comment a bit more on this than me and maybe in more detail? And then I will take the second question after.

Yes. I think, Cyrille, you made the key point already, yes. As I said earlier in this call, we have still profited from the raw material tailwinds in the first half of the year. But what we are certainly seeing with raw materials typically rolling into our P&L with a time delay of 4 to 6 months is that in the second quarter of the year, we actually felt the pain, let's put it like this from the raw materials. So middle of the second quarter, we started to see that coming in. And as Cyrille pointed out, to counteract the raw material price increases which are rolling into our P&L, we have put in place respective price increases on the sales side to counteract that. And our assumption is, is still that we can also in the second half with higher prices rolling into the P&L counteract a large portion of that with the price increases that we've put in place.

Thanks, JC. Your second question was on Commercial, and when do we expect Commercial to come back on pre-COVID-19? To be frank, if you had the answer, I would be more than happy to take it. It's very uncertain. It's up and down. So what we see in U.S., we have an order book that is extremely high. So we're -- I'm talking commercial. So we have order book that is extremely high. We're pretty happy with that. But it -- so this -- 2 weeks ago, what we saw is a bit of a slowdown in order taking because a lot of people are talking about the variants now. And you have some business that have announced that people will -- well, their employees will only come back at the end -- at early 2022. So it's delaying the refurbishment of their offices. So we have a bit of ups and down. We see definitely something coming in 2022, and we're quite positive about it in 2022. What I can tell you is strong order book on both sides of the Atlantic. JC, any comments on this one or any additional thing that -- yes.

Yes. Thanks, Cyrille. I just wanted to make 1 additional comment to that. As Cyrille said, we see the order book now finally moving up, especially in Americas, yes. And what we can also see and what I think is very important to highlight about commercial is we still see a very good business, yes. We are at the 70, 80 percentage levels. As you can see, we are very stable on these levels. But what is important for us and for our market position is that we can keep sales prices at these levels, yes. We are selling at the high end of the market. And when you look at the margins, for example, we are returning an 80.2% margin for the second quarter and a 16.2% margin for the first half year. So it still shows that there's very strong business, very resilient to the crisis. And now we see still some cautiousness in orders picking up, especially as there is some lead times in these orders picking up. But as Cyrille said, the order book is coming back, and yes, we will see it returning. But the underlying business stays very strong and very resilient, which is reflected by the margins.

Yes. So thanks, JC. This is absolutely important what you're saying. And what -- pretty much what it means is, we're very flexible in our approach to volume. And we have been proving that over time in the last few quarters. The last question is on e-commerce, on Rugs; and how much it will represent. So we won't say that as well, sorry about that. What I can tell you is that -- and as Emmanuel told us, Rugs has doubled in -- from 1 year to the next on the pure player side. So it's moving in the right direction. We're getting where we want to go. We're getting almost there. We are investing in European e-commerce business. As we speak, we -- so we take a different approach than what we have done in U.S. So no fixed cost, very few fixed costs, but we're getting in the e-commerce in Europe as well. And we have invested in several software, making sure that the e-commerce, we can manage e-commerce in a very flexible and a lot better way that we're doing before. So e-commerce will definitely take a bigger part of our business in the next few months and few years. So Saad any -- does that answer your question, even though that it might be partial?

Very much.

Okay. Any additional questions?

No. That would be it.

Anyone, any additional questions, yes?

As of now, we don't have any more questions.

Okay. So thank you very much for assisting to our call. I think what we're showing here is definitely something -- well, a result that is satisfying for the team. I can tell you, it takes a lot of work to get to where we are today. And the Balta team is dedicated to make it work. So I would like to thank all of them again, and thank you for assisting and we'll talk to you on the 29th of October. Bye.

Ladies and gentlemen, this concludes this conference. Thank you all for your participation. You may now disconnect.